Republicans kill the border tax

In a rare break from discord and finger-pointing, Washington’s top Republicans have announced their joint intention to cut taxes and simplify the tax code.

It’s not news that President Donald Trump and the Republicans who control Congress want to cut taxes. But House Speaker Paul Ryan has now agreed to abandon a controversial “border-adjustability tax” that would have taxed imports and given an advantage to American-based companies that export. It’s a setback for Ryan and allies who hoped to gain billions in revenue from the BAT that they could use to slash income taxes. But it streamlines the Republican tax-cut plan by removing a measure that drew strident opposition from powerful retailers such as Walmart (WMT) and Target (TGT).

A complex plan to raise revenue

The BAT was a complicated—and, to some economists, elegant—way of raising new revenue without really harming anybody. That’s the theory, anyway. The plan would have changed tax incentives in a way that made products imported by companies costlier, with a corresponding tax exemption on products exported by US companies. If nothing else changed, those cost increases on imports would be passed along to consumers buying retail products, imposing a big hit on purchasing power. But many economists argued that the dollar would appreciate against other currencies on account of the changes, negating the higher prices, since the US currency would now buy more. If it all worked out, the end result would be additional revenue for Uncle Sam, plus a new set of incentives likely to end the need for US-based companies to relocate overseas in order to take advantage of more favorable tax laws there.

House Speaker Paul Ryan (R-WI) speaks about healthcare at his weekly press conference. REUTERS/Yuri Gripas TPX IMAGES OF THE DAY

The problem, however, is that no country has ever tried a BAT, so it’s not clear if reality would match theory or unintended consequences would arise. And if the dollar didn’t appreciate as expected, it would, in fact, raise prices on millions of everyday items. That’s why retailers fought the BAT, and even Trump himself said the scheme was “too complicated.”

Ryan has a detailed tax plan that relies on the BAT, but Senate Republicans have indicated it has little chance of making it into a Senate plan. So dropping the BAT altogether eliminates a key source of friction between House and Senate lawmakers. There’s still no joint plan, but for once, senior people in the House, Senate and White House are essentially saying the same thing on a major policy issue.

‘A shared vision for tax reform exists’

The White House issued a statement on July 27 on behalf of key leaders in the House and Senate, along with Treasury Secretary Steve Mnuchin and Trump economic adviser Gary Cohn, saying, “We are confident that a shared vision for tax reform exists. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas.”

There are no further details, yet, but Trump wants to slash the corporate tax rate from 35% to 15% and cut individual rates for the middle class. Such a steep cut in the corporate rate would probably lower federal revenue by too much, but a compromise outcome could be a corporate tax rate in the mid 20s. Trump has wavered recently on tax cuts for wealthy Americans, suggesting he may forgo cuts in the top tax bracket in order lend a more populist bent to his tax plan and raise the odds it can pass. The tax plan Trump released as a candidate would have produced far bigger savings for wealthy earners than for those in the middle.

Trump and his fellow Republicans desperately need a legislative win, with efforts to repeal Obamacare and fulfill that campaign promise a spectacular flop, so far. Cutting taxes ought to be easier, though there will be pushback from budget hawks to any plan that adds to the $20 trillion national debt. Still, tax cuts have been part of the Republican orthodoxy for decades. If they can’t do this, they can’t do anything.